MH Restructuring

Friday 9 December 2016

“Brexit”– Implications for Business Rescue?

As with everything else EU-related at the moment, it is hard to discern the full scope of the legal framework which will apply to UK businesses which succumb to financial troubles in the coming months and years.

The purely domestic legislation governing insolvency and restructuring is about to undergo some changes with a wholesale update of the Insolvency Rules. The current Insolvency Rules date back to 1986 and have been subject to revision on no less than 23 occasions since then. The new Insolvency Rules will come into effect in April 2017 as a fully revamped consolidation of the detailed rules which complement the broad provisions of the Insolvency Act 1986, which remains the central piece of legislation governing insolvent debtors (both corporate and individual) in the UK.

Of more interest and potentially greater impact (depending on the ultimate outcome of the Brexit negotiations with the EU) is the raft of new rules addressing companies in financial difficulty coming into play in Europe. The EC Regulation on Insolvency Proceedings 2000 (the Regulation) has been in operation since 2002 and has effected an ordered regime across the EU to address the affairs of an insolvent debtor which extend into more than one EU member state based around the concept of the debtor’s “centre of main interests” (or COMI). A recast and update of the Regulation is due to be implemented during 2017. This is designed to bolster the rules which support one of the central tenets of the Regulation, namely recognition across the EU of the laws of the member state where a debtor has its COMI – this has a direct bearing where there are cross-border elements concerning the debtor’s business, assets and creditors.

Supplementing the recast of the Regulation is another EU initiative by way of proposed directive on “preventative restructuring, insolvency and second chance”. The genesis of this has been the attractiveness of certain UK insolvency processes and rules, without equivalent elsewhere in the EU, which have driven a significant volume of insolvency and bankruptcy business into the UK and away from other EU countries. In other cases, such “forum shopping” has been driven by a desire to take advantage of more lenient insolvency and bankruptcy sanctions applicable here in the UK. The EU has responded with the directive which introduces a range of new EU-wide restructuring and pre-insolvency processes and principles drawing on domestic UK procedures and also the Chapter 11 rules in the US Bankruptcy Code. For example, the directive will introduce the concept of creditor “cram down”, a process whereby, say, a loan agreement stipulation that bank syndicate decisions must be made unanimously can be substituted for a lesser requirement for a majority vote instead. This cram down mechanism applies both in Chapter 11 insolvencies in the US and in schemes of arrangement here in the UK and serves to facilitate restructurings which are approved by a majority of, if not all, creditors, recognising that such arrangements can often involve determined hold-out creditors who threaten to scupper the broader interests of both the debtor and the majority of its creditors in favour of a proposed restructuring.

So what does all of this mean for the UK? It is hard to say. An overhaul of some of our domestic rules is overdue and welcome. Depending on what might ultimately be agreed by the Government in terms of a “hard” or “soft” Brexit and the timetable for the transition, the UK might well face a double whammy – being a less attractive forum for the restructuring of insolvent EU debtors whilst simultaneously experiencing regression in terms of future co-operation from EU courts and authorities as regards distressed UK debtors with European assets and / or liabilities as a result of the potential loss of our access to the Regulation and other pan-EU legislation. Only time will tell. Meanwhile, we will be sure to update you on the new rules as and when they are brought into force.